UK: Regulatory Developments - February 9, 2016

SMR, certification regime and conduct rules

The second half of 2015 has seen the PRA and the FCA finalise
many elements of the SMR, certification regime and conduct rules in
advance of the start of implementation, on 7 March 2016. Firms
still face a significant challenge in being ready for that date, in
part because of the scale of the task they need to undertake, but
also because some aspects of the new rules are not yet final, and
others have only recently been finalised. We set out below a
summary of the individual accountability documents published since
our last update, including those linked to, but not strictly part
of, the SMR.

Strengthening accountability in banking: final rules (including
feedback on CP14/31 and CP15/5) and consultation on extending the
certification regime to wholesale market activities

The FCA appended its final rules in relation to the SMR,
certification regime and conduct rules for UK relevant authorised
firms to this consultation paper. In addition, the FCA consulted on
extending the certification regime. While the title of that
consultation related to wholesale activity, the proposed new rules
themselves were not limited in that way, and created new
certification functions relating to client-dealing and algorithmic
trading. The new draft rules also proposed extending the definition
of "client" for these purposes.

The PRA used this policy statement in order to set out its
remaining final rules in relation to UK relevant authorised firms
(many of its rules having been published in the first half of the
year). Such rules included transitional provisions, forms, and
requirements relating to non-executive directors.

The PRA also appended its Supervisory Statement in relation to
the SMR, certification regime and conduct rules. That Supervisory
Statement has since been updated to reflect the PRA's guidance
in relation to UK branches of non-EEA firms.

Conditions, time limits and variations of approval

In this publication, the PRA set out its policy in relation to
its powers under the SMR to grant conditional approvals in relation
to applicants seeking to perform Senior Management Functions
(SMFs). It is worth noting that this policy document will need to
be amended, as the original SMR did not include a power to vary
time-limited approvals, only other conditions placed on them. The
Treasury announcement referred to below indicated that this
omission in the SMR would be corrected, but the timing for this
change is not clear.

The FCA used this feedback statement in order to append
near-final rules in relation to the UK branches of overseas banks.
Its rules were not made final, pending HM Treasury making the
necessary order, but the FCA indicated that it did not anticipate
them changing substantially. The rules are divided between the UK
branches of EEA authorised banks and the UK branches of banks
authorised in other jurisdictions. The rules relating to both are
complicated. In general terms, there are more requirements
applicable to non-EEA banks, but EEA banks will have to negotiate
the difficult issues of which matters are, and are not, reserved to
their home state regulator. Final rules were produced by the FCA in
December 2015 (as to which see below).

The PRA's summer publication in relation to UK branches of
overseas banks differed from the FCA's in two key respects: one
of scope and one of approach. The PRA's rules do not affect the
UK branches of EEA banks, which will therefore only need to
consider the FCA's rules. In terms of approach, the PRA opted
to make a number of its rules as final rules in the summer, leaving
as near-final only those that it believed it could not make without
the necessary Treasury order. As to the PRA's subsequent
revision of its rules, see below.

In this joint consultation paper, the PRA and the FCA consulted
on how best to implement the recommendations of the Fair and
Effective Markets Review (as to which see below) on the provision
of regulatory references, to prevent "rolling bad
apples". The regulators' final rules are still awaited,
but the key proposals include requiring firms to request regulatory
references going back six years from former employers of candidates
applying for SMFs and certification functions, and requiring that
disclosures in response to such requests be provided in a standard
format by certain firms. References provided over the previous six
years would have to be updated were the referee firm to become
aware of matters that would cause it to draft the reference
differently.

The FCA and the PRA have separately published final rules in
relation to whistleblowing. Insofar as they relate to
deposit-takers, the new rules will only apply to those UK firms
that are within the scope of the SMR, and the changes are, in some
respects, connected with the SMR. The rules will not apply to the
UK branches of overseas banks initially, although the FCA says that
it will consult in relation to them. The new rules require that a
non-executive director who performs an SMF be allocated the
prescribed responsibilities of the "whistleblowers'
champion", which are (in essence) to ensure and oversee the
integrity, independence and effectiveness of the firm's
policies and procedures on whistleblowing, including those intended
to protect whistleblowers from being victimised. There are rules in
relation to the content of settlement agreements, and rules in
relation to the training and information that must be provided to
employees. The rules also require certain records to be maintained
and information to be provided to regulators.

HM Treasury used this paper to announce the extension of the SMR
and certification regime to all firms authorised under FSMA. This
change is expected to happen during 2018, but there is clearly a
substantial amount of ground that will have to be covered before
then.

Of more immediate interest were the changes announced to the
rules that banks are in the process of trying to implement. Such
changes came within four main categories:

the presumption of responsibility (whereby senior managers
would be presumed to be responsible for breaches within their area
of responsibility, unless they could show that they had taken
reasonable steps to prevent them) was to be removed, and replaced
by a duty of responsibility. This amendment was the subject of an
unsuccessful objection by some members of the House of Lords, and
it is said that final rules in this area will be made in time for
implementation of the SMR;

there will be rules allowing regulators to make conduct rules
applicable to so-called notified non-executive directors;

the rules requiring all breaches of conduct rules to be
notified to regulators will be amended in time for implementation;
and

the drafting lacuna that meant the FCA and the PRA had the
power to vary conditions placed on approvals, but not time limits,
will be corrected.

As set out above, the PRA made most of its rules in relation to
the UK branches of overseas banks based outside the EEA in final
form. There were some provisions, however, which were not published
in final form until December 2015. The only significant change as a
result of the finalisation of all the PRA's rules was to the
table of functions into which individuals could be
grandfathered.

Strengthening accountability in banking: UK branches of foreign
banks

The FCA appended to this policy statement its final form rules
for the UK branches of overseas banks, based both in and outside
the EEA. The FCA has flagged only two significant issues following
feedback in relation to its near-final rules. First, in relation to
non-EEA branches, the FCA accepted that the inclusion within the
scope of its certification regime and conduct rules of individuals
"dealing with UK clients", as well as individuals based
in the UK, potentially caught a wide range of employees. It has
therefore removed that criterion, temporarily, as a basis for
inclusion of individuals within those regimes. Second, the FCA has
confirmed that the inclusion as relevant authorised persons of EEA
firms which accept deposits in the UK on the basis of a services
passport, but which have an establishment passport in relation to
other activities, is a requirement under FSMA.

Final notices and judgments

Co-op Bank avoided fine but subject to censure

The FCA and (more unusually) the PRA issued a public censure of
the Co-operative Bank (Co-op Bank) for breaches of Listing Rule
1.3.3R (misleading information not to be published) and Principle
11 (dealing with regulators in an open and co-operative way).
Interestingly, they did not impose a financial penalty,
notwithstanding that one was merited, as Co-op Bank was engaged in
a turnaround plan to ensure it had adequate capital, and a
financial penalty would endanger this. Co-op Bank had incorrectly
recorded in its published annual accounts that it had adequate
capital in the most severe stress scenarios. Co-op Bank also failed
to notify intended changes to two senior positions and the reasons
behind those changes.

Catalyst

In August 2013, the FCA issued decision notices in relation to
Timothy Roberts and Andrew Wilkins. Mr Roberts and Mr Wilkins were
directors (and Mr Roberts was CEO) of Catalyst Investment Group
Limited (Catalyst). The decision notices contained fines (of
£450,000 and £100,000 respectively) and bans preventing
Mr Roberts and Mr Wilkins from performing any role in relation to
regulated financial services. Both Mr Roberts and Mr Wilkins
referred their decision notices to the Upper Tribunal.

The Upper Tribunal largely upheld the FCA's decision in
relation to Mr Roberts (although not all elements of it). In
relation to Mr Wilkins, however, it disagreed with the FCA that Mr
Wilkins was not fit and proper to perform any role in relation to
financial services, and accordingly it rejected the FCA's ban.
It also reduced the fine imposed to £50,000.

The enforcement action related to Catalyst's role in the
distribution of bonds in relation to which Catalyst knew that the
issuer considered that it needed, and did not have, a licence.
Catalyst nonetheless provided misleading information to investors,
collected funds from them, and did not ring-fence those funds.

The aspect of the Upper Tribunal's decision that has
attracted attention is its rejection of the FCA's allegations
against Mr Wilkins. It rejected the assertion that he acted without
integrity, although Mr Wilkins himself accepted that he had lacked
due skill and care in certain respects. The Upper Tribunal
therefore remitted to the FCA the decision as to whether Mr Wilkins
should be banned.

The FCA considered that the Upper Tribunal's decision was
not fully reasoned, and it therefore invited the Upper Tribunal to
reach the conclusion that, even if Mr Wilkins passed the "fit
and proper" test from the point of view of integrity, he
nonetheless failed it in terms of competence. The Upper Tribunal
therefore produced additional reasons, the following month,
clarifying that it considered the FCA to have failed to discharge
its burden of proving Mr Wilkins not to be fit and proper,
including as to competence.

FCA obtained injunction and penalty for market abuse

The defendants in this case were alleged by the FCA to have
engaged in "layering" or "spoofing" in relation
to high-volume trading of CFDs relating to shares listed on the
London Stock Exchange, in 2010 and 2011. The FCA sought an
injunction in relation to the alleged market abuse under section
381 of FSMA and, for the first time, also sought the imposition of
a financial penalty by the court under section 129, rather than
imposing the penalty itself.

In considering the FCA's claim, the judge stated that he
found it obvious based on the wording of FSMA that there was no
jurisdiction for the court to impose a financial penalty under
section 129 unless it found that the relevant defendant had engaged
in market abuse. The judge rejected the argument that it was an
abuse of process for the FCA to apply to the court to impose a
financial penalty without going through its internal processes in
order to impose the penalty itself. He noted, however, an apparent
inconsistency in the drafting of FSMA that meant that defences
available where the FCA was considering imposing a financial
penalty (under section 123 of FSMA) were not expressly stated to be
available where the court used its powers under section 129. It was
suggested by the FCA, however, that the court should construe
section 129 as though it referred to the same defences. The judge
also declined to find that the power to impose a penalty was
available only where the court actually granted an injunction.

Da Vinci Invest (DVI, the first of six defendants in this case)
argued unsuccessfully against the view that market abuse was to be
judged objectively, and did not require the person committing it to
have a particular state of mind. The judge further rejected the
suggestion that a company such as DVI could avoid liability for
market abuse where the relevant behaviour was entered into by
traders engaged by it as contractors, rather than by employees. The
judge was also called on to decide the appropriate standard of
proof in a case of this kind. The judge agreed with the FCA that
the ordinary civil standard (balance of probabilities) was the
appropriate test, but held that the court should take into account
(as it would in a case of civil fraud) the inherent improbability
of the behaviour alleged taking place, when applying that test.

In determining whether the defendants had engaged in market
abuse, the judge decided that it was appropriate for the court, of
its own motion, to take into account the matters set out in Article
4 of the Market Abuse Directive (shortly to be replaced). He also
rejected the suggestion that the court had to hear evidence from
actual market participants that they were misled. In terms of
available defences, the judge found that, while DVI did not
actively turn a blind eye to the behaviour of traders on its
behalf, it was reckless as to that behaviour in the interests of
maintaining profit, and as such did not have a defence. In
calculating the appropriate penalty, the judge took the view that
it was appropriate to use the procedure under DEPP that the FCA
would use were it imposing a fine.

Further action by the FCA in relation to Keydata

The FCA fined Mr McNeil (Keydata's former finance director)
£350,000 and prohibited him from performing any significant
influence function in relation to regulated activities performed by
any authorised person, exempt person or exempt professional firm.
It found that Mr McNeil had breached the APER Statements of
Principle 4 (appropriate disclosure to the FCA) and 6 (acting with
due skill, care and diligence).

The allegations against Mr McNeil related chiefly to the fact
that he was aware that Keydata was not receiving payments from the
issuer of the bonds in which it had invested its clients'
funds. It did not alert either investors or the FCA to this fact,
but continued to meet payments to investors from its own corporate
funds, thereby masking the issuer's problems. Mr McNeil was
also responsible for the preparation of Keydata's board
minutes, which the FCA found did not record what Mr McNeil later
stated to have been the key points of various board meetings. In
addition, Mr McNeil had permitted various payments and
transactions, the purpose of which he did not fully understand.

Defects in FCA's enforcement action

In 2012, the FCA produced a decision notice, fining and banning
Angela Burns based on findings that she had misused her position as
a non-executive director in order to further her commercial
interests, and that she had failed to disclose conflicts of
interest. These failings were said to be in breach of APER
Statement of Principle 1, in relation to the integrity required of
persons performing a controlled function. Ms Burns referred the
decision notice to the Upper Tribunal.

The FCA pursued 10 allegations against Ms Burns, of which the
Upper Tribunal (in December 2014) upheld four, finding (in May
2015) that Ms Burns was not fit and proper to perform the CF2
function, and that the FCA should impose a fine on her (albeit a
significantly reduced one, set at £20,000). Its decision in
September was as to Ms Burns's application for the FCA to pay
her costs (in the amount of some £1.8 million, including
charges for her own time at £565 per hour).

Ms Burns's application was made on a number of grounds, some
of which the Upper Tribunal found entirely unconvincing. She was
successful in persuading the Upper Tribunal that the FCA had been
unreasonable in seeking to enforce its original fine of
£154,800, even where the Upper Tribunal had found that six
out of the 10 allegations pursued by the FCA failed. The Upper
Tribunal found, however, that it would not be appropriate to award
Ms Burns her costs of the FCA's unreasonable action in this
regard. It did, however, award her costs of £100,000 in
relation to the FCA's decision to restore for the purposes of
the proceedings before the Upper Tribunal a mistaken allegation
that Ms Burns had solicited a bribe. The Upper Tribunal noted that
the allegation was a serious one, and that the RDC had suggested
that it be removed from the decision notice.

Fine and ban in relation to failings by Aviva Investors

The FCA fined Mr Miah £139,000 (taking account of a
discount for early settlement) and banned him for five years. The
FCA's action related to Mr Miah's role in relation to
failings identified by the FCA in relation to Aviva Investors
(summarised in our last update), where he was an investment
analyst.

Aviva Investors was fined, and paid compensation to clients, in
relation to a failure of systems and controls that had allowed
cherry-picking by some of its staff, including Mr Miah. Mr Miah had
taken advantage of such failures in order to avoid allocating
investments he made to particular clients until he could assess
their performance during the day. The FCA found that this showed a
want of integrity, in breach of Principle 1 of the Statements of
Principle for Approved Persons, and imposed the penalties
summarised above on the basis that Mr Miah was not fit and proper.
It decided, however, to impose a five-year time limit on the ban
placed on Mr Miah, in view of his open and contrite attitude.

Failures in relation to prevention of financial crime

The FCA fined Barclays £72,069,400 in respect of failures
to manage appropriately the risk of financial crime posed by a
single deal in 2011 and 2012. The FCA found that such failures
amounted to a breach of Principle 2, which states that a firm must
conduct its business with due skill, care and diligence.

Barclays engaged in a large transaction with clients which it
had itself identified as susceptible to a greater than usual risk
of bribery or corruption, based on the application of various
criteria Barclays used in order to identify what it termed
"Sensitive PEPs". This would ordinarily have triggered
Barclays to follow internal procedures for dealing with clients of
this kind. In this case, however, Barclays had entered into a
confidentiality agreement with the clients (the Confidentiality
Agreement). The Confidentiality Agreement required that Barclays
restrict knowledge of the identity of the clients to a very small
number of individuals, including within the bank. If Barclays
breached the Confidentiality Agreement, it would be liable to
indemnify the clients up to the amount of £37.7 million.

In order to maintain the confidentiality of its clients,
Barclays decided to bypass its usual AML procedures. It also
decided to keep the clients and the transaction off its IT systems.
It was not automatically a problem, in the FCA's view, that
Barclays departed from its usual procedures. The difficulty was
that it did not put in place an acceptable alternative. There was
no indication that actual financial crime had taken place, but the
steps Barclays had taken to prevent it were fewer than it would
usually undertake in relation to ordinary clients.

The FCA's approach to enforcement was interesting in a
number of respects. First, the FCA did not refer to any breach of
Principle 3 (requiring a firm to take reasonable care to organise
and control its affairs responsibly and effectively, with adequate
risk management systems), which might seem a more natural basis for
enforcement in this case. It is impossible to know why the FCA did
not rely on Principle 3, but the most probable reason may be that
the Final Notice does not criticise Barclays's risk management
systems, as opposed to the fact that they were bypassed in this
case. Second, while the requirements of the Money Laundering
Regulations are referred to throughout the Final Notice, and the
implication is that they were breached, such breaches are not
stated as part of the basis for the FCA's enforcement
action.

Failure to put in place adequate controls and inaccurate
disclosure to regulators

Threadneedle Asset Management Limited (TAML), an investment
management firm, was fined £6,038,504 by the FCA for breaches
of Principle 3 (taking reasonable care to organise and control its
affairs responsibly and effectively) and Principle 11 (dealing with
regulators in an open and co-operative way). The FCA had asked TAML
to report on its risk mitigation, specifically the extent to which
fund managers were limited in their ability to book trades. TAML
reported that certain members of staff would have oversight of
"all aspects of dealing". It later transpired that fund
managers remained able to book trades independently of supervision,
resulting in a potentially hazardous unauthorised transaction being
initiated. The FCA fined TAML both for the failure of control and
for misreporting its levels of control. The penalty was reduced by
20 per cent, because TAML agreed to settle at an early stage of the
FCA's investigation.

Culture and related issues

Strengthening the alignment of risk and reward: new
remuneration rules

This policy statement followed the joint PRA CP15/14 and FCA
CP14/14 published in July 2014, and reflected the feedback received
from that consultation. The regulators maintained their position on
the length of proposed minimum deferral periods for bonuses,
accepting that these exceeded the periods set out in the Capital
Requirements Directive (CRD) in places, but justifying their
decision. The regulators confirmed their position of introducing a
presumption against discretionary payments being justified for
management of banks in receipt of government support. The
regulators committed to exploring the possibility of buyouts of
deferred bonuses to be subject to malus by a previous employer. The
regulators confirmed that non-executive directors would be banned
from receiving bonuses. The FCA also affirmed its proposed guidance
on proportionality, and made small amendments to its proposed
guidance on ex-post risk adjustment to bonuses, while the PRA
announced its intention to introduce stricter requirements in
relation to risk adjustment and performance metrics.

The only significant change announced in this policy statement,
in comparison to the consultation paper, relates to which employees
come under which minimum deferral periods for bonuses. For PRA
regulated firms, certain material risk takers (MRTs) (those who are
not in significant risk functions) will only be subject to the CRD
mandated minimum deferral period (three to five years), rather than
the originally proposed five years. Other MRTs will still come
under a deferral period of five years. For non-PRA regulated firms,
all MRTs who are not within the SMR will be subject to the CRD
minimum in any case. For all firms, employees who fall under the
SMR will have a seven-year minimum deferral period.

It is notable in this context that the EBA published its final
guidelines on remuneration policies on 21 December 2015, including
an opinion on the application of proportionality. This opinion
agrees with the European Commission that exemptions or waivers to
any of the remuneration principles are not permitted whether on
grounds of proportionality or otherwise. Nevertheless the EBA
recommends that the CRD should be amended to exclude small and
non-complex firms from certain remuneration principles, including
deferral, but not the "bonus cap". The EBA has also
stated that its guidelines will not apply until 1 January 2017, and
the rules will first apply to the 2017 performance year, so firms
will not have to adjust existing pay practices yet. A further
announcement from the FCA and the PRA is expected in due
course.

Risks to customers from performance management at firms –
thematic review and guidance for firms

The FCA produced guidance following a thematic review of the way
in which performance management within firms could pose risks for
consumers. Its review was broader in scope than issues connected
purely with remuneration, and the finalised guidance refers to
formal processes, sales targets and informal communications between
sales staff and their managers. The FCA's review was not based
on direct assessment, but on information received from
whistleblowers and media reports, which was then followed up with
firms. The review found instances of poor practice, but no
widespread issues.

The FCA's guidance recognises the potential impact on sales
staff's behaviour of many strata of management, including
pressure applied indirectly from the business needs articulated by
senior management. The FCA stated, however, that the right
"tone from the top" is not enough, and firms must look
not only at their policies in relation to performance management,
but at what happens in practice. It recognised that middle
management might be under particular pressure to manage conflicts
between business needs and avoiding inappropriate selling. The
guidance considered the different sources of information available
to firms in determining whether undue pressure was being placed on
staff to achieve sales targets, as well as identifying some
examples of both poor and good practice. In general terms, it is
clear that the formal creation of a balanced scorecard, or
compliance with remuneration requirements, will not be enough to
satisfy the FCA where other aspects of a firm's management of
its staff are aimed solely at achieving sales, without proper
consideration of the customer's needs.

Decision not to proceed with review of culture within
banks

In its Business Plan for 2015/2016, the FCA indicated that it
would be carrying out a thematic review of culture in retail and
wholesale banks. It was reported at the very end of 2015 that the
FCA would not be publishing that review, but the FCA has maintained
that it continues to focus on culture as an issue, including at
supervisory level with individual banks. The decision, which will
have appeared quite reasonable to some in light of the many reforms
touching on culture that are still to be fully implemented, has
attracted criticism from others, including MPs and consumer
groups.

Dealing with customer complaints

Fair treatment for consumers who suffer unauthorised
transactions

The FCA conducted a thematic review into firms' treatment of
customers who suffer unauthorised transactions. The review looked
at the application by firms offering current accounts and credit
cards of the provisions of the Payment Services Regulations and the
Consumer Credit Act 1974. In general, the FCA found that no further
thematic work was needed. While requirements were sometimes
complex, firms were generally meeting the relevant requirements,
and tended to err on the side of the customer in considering
claims. The FCA had been concerned that firms might have been
holding customers to over-prescriptive security requirements, but
it did not find this to be the case. The review contains various
examples of good (and indeed some poor) practice. Where the FCA
identified concerns, they included: terms and conditions that did
not fully inform the customer of his/her rights; lack of clear
policies for considering claims; and over-reliance on a small
number of staff to consider complaints received.

Improving complaints handling, feedback on CP14/30 and final
rules

The FCA set out its final position in relation to reforms to the
rules around the handling of complaints by FCA-regulated firms,
consulted on in CP14/30. These rules apply to all FCA-regulated
firms within the scope of the Compulsory Jurisdiction of the
Financial Ombudsman Service (FOS): participants in the Voluntary
Jurisdiction of FOS are subject to separate rules. Firms are
currently permitted not to use a formal response letter to
complaints where they respond to complaints before the end of the
next business day after receiving the complaint and the complainant
accepts their response. The FCA will extend this to the end of the
third business day after receiving the complaint. Firms do not
currently have to report the number of complaints dealt with in the
shorter timeframe. The FCA will make firms report all complaints,
whether dealt with in the shorter timeframe or not. In addition,
the FCA pledges to amend the twice-yearly "complaints
return" that firms currently have to send reporting those
complaints. The FCA will also require firms to send a communication
to complainants dealt with in the shorter timeframe summarising the
response and highlighting their potential recourse to the FOS.
These changes will come into force on 30 June 2016. The FCA also
said it would require firms to use basic rate phone numbers for
customers calling them, rather than premium rate phone numbers, a
change which came into force on 26 October 2015.

Changes to DISP

These changes to DISP were made in order to implement the
Alternative Dispute Resolution Directive (the Directive) in the UK.
Like PS15/19 (referred to above), these amendments were the subject
of consultation in CP14/30. The amendments described below apply to
the handling of complaints received by firms from 9 July 2015
onwards. Overall, while firms will need to take careful note of the
changes introduced in order to implement the Directive, it seems
unlikely that they will make any substantial difference to
firms' complaints handling in practice.

There are some changes to the information firms must provide to
complainants, but the majority of the amendments to DISP relate to
referrals to the FOS, by whom they can be made, and when. Where a
professional client or eligible counterparty meets the definition
of "consumer" adopted by the UK in its implementation of
the Directive, he or she will be able to refer a complaint to the
FOS. The FOS will now be able to consider a complaint referred to
it before a firm has provided its final response to the complaint,
or the eight-week period for it to do so has expired, where both
complainant and firm agree. Even where this happens, the early
reference to the FOS does not absolve the firm of its obligation to
deal with complaints within the usual time period.

There are also now only five grounds on which the FOS can refuse
a complaint without considering its merits. In particular, the FOS
will no longer be able to dismiss a complaint without considering
its merits on the grounds that it relates to investment
performance.

Rules and guidance on payment protection insurance
complaints

The FCA consulted on imposing a deadline for complaints relating
to PPI. Such deadline is to be preceded by a communications
campaign, funded by a new fees rule. Consultation closes on 26
February 2016. The consultation paper records that, to date, firms
have paid a total of over £21 billion to 12 million customers
in relation to PPI. It also records various issues with complaints
received. It was anticipated that the FCA would seek to draw a line
under this at some point, and that line is proposed as being two
years from the implementation of new rules following the outcome of
the consultation.

In some ways more interesting is the second matter dealt with in
the consultation paper, which is the approach the FCA says should
be adopted in light of the Supreme Court's judgment in
Plevin, where a claim could be made under the unfair
relationship provisions of the Consumer Credit Act 1974. The FCA
proposes, in relation to such cases, that firms that would
otherwise be minded to reject a PPI complaint should be obliged to
undertake a "step 2" assessment. In basic terms, that
second step would require firms to consider whether the amount of
their commission was disclosed to the customer and, if not, whether
such lack of disclosure gave rise to an unfair relationship. In
general, they should assume that it did if the commission accounted
for 50 per cent or more of the total amount paid by the customer.
The FCA also consults on the appropriate basis for redress in such
cases. It does not propose asking firms proactively to review past
decisions in relation to complaints that might have been affected
by this rule change.

Fair and Effective Markets Review (FEMR)

FEMR's final recommendations

FEMR's final report (into the fixed income, currency and
commodities (FICC) markets) recommended various actions, some of
which have already led to proposals for implementation, others of
which will take longer to put into practice. FEMR itself grouped
its recommendations under various headings.

Raising standards, professionalism and accountability of
individuals – much of this work is expected to be done by the
introduction of the SMR, certification regime and conduct rules.
FEMR also recommended introducing globally endorsed trading
standards for FICC markets, new training requirements, and the
extension of criminal sanctions for market abuse, including an
increase from seven to 10 years in the maximum sentence. That
increased maximum is still less than the sentence imposed on Tom
Hayes, who was prosecuted for conspiracy to commit fraud in
relation to his role in LIBOR manipulation, and sentenced to 14
years in prison (subsequently reduced to 11). FEMR also recommended
the creation of requirements in relation to regulatory references,
to prevent "rolling bad apples", and this recommendation
is the subject of ongoing consultation.

Improving the quality, clarity and market-wide understanding of
FICC trading practices – the main recommendation under this
heading was the creation of a new FICC Market Standards Board
(FMSB) including both firms and end-users of benchmarks, which is
to assume a number of responsibilities, including in relation to
establishing the minimum training standards referred to above. The
FMSB's website contains some details of its membership and how
it will work, but there are few indications as to future
timing.

Strengthening the regulation of FICC markets in the UK –
this includes the creation of a new statutory civil and criminal
market abuse regime in relation to spot FX. It also included
extension of the SMR, certification regime and conduct rules to
firms other than banks. The efficacy of these rule changes is, of
course, still to be tested, but FEMR has recommended rolling them
out to a wider range of authorised firms in some form.
Interestingly, it did not advocate extending the presumption of
responsibility, which has since been dropped in relation to banks
as well. HM Treasury has since announced that the new regime will
be applied to all authorised firms, although its precise form
remains to be seen.

Launching international action to raise standards in global
FICC markets – part of this work includes the creation of a
single global FX code (the Bank of International Settlements has
set up a working group aimed at achieving this), and the adoption
of transparency and controls around FX.

Financial benchmarks – thematic review of oversight and
controls

This review was, as its name implies, a review into firms'
oversight and controls in relation to financial benchmarks. What
was perhaps less obvious was the FCA's view of what a
"benchmark" actually was. Many of the failings it
identified appear to have been attributable to firms not treating
as benchmarks things that the FCA considered should have been. The
FCA considered that firms should adopt a broad interpretation of
the IOSCO definition of benchmarks which would potentially include
activities that would not immediately be associated with benchmark
activity. It also appears that the FCA does not consider it to be
of primary relevance whether a firm considers a published price
calculation to be a benchmark, if it is capable of being used in
that way. It is worth noting in this context that negotiations are
ongoing in the EU as to the EU Benchmarks Regulation, and it
appears from the documents published in relation to those
negotiations that there is potential for a differently drawn
definition of "benchmark" to emerge.

The FCA's review considered 12 banks and broking firms, and
found that none had fully implemented changes across all benchmark
activities. Its review excluded LIBOR and the WM Reuters 4 p.m.
fix. The FCA's key messages were that:

firms needed to adopt the broad IOSCO definition of a
benchmark;

senior management needed to act quickly in relation to
remaining gaps, in that progress to date had not shown sufficient
urgency;

firms needed to strengthen governance and oversight, in order
to ensure proper management information, monitoring and
co-ordination of roles;

firms needed to review how conflicts of interest might arise
and take steps to manage them;

firms needed to pay more attention to in-house benchmarks,
where conflicts of interest might exist in relation to, for
example, their design and their subsequent use;

firms should give proper consideration to the effect of exiting
a benchmark, which the FCA considered should take place in an
orderly fashion.

Ring-fencing

Disclosures to consumers by non-ring-fenced bodies

The Financial Services (Banking Reform) Act 2013 created a
category of ring-fenced bodies (RFBs) that would only be permitted
to carry out retail, not investment banking. Under a later
statutory instrument, the FCA was required to make rules for the
disclosure of relevant information to individuals who are, or seek
to become, account holders with non-ring-fenced bodies (NRFBs), and
this consultation paper set out the FCA's proposals and sought
views on them. NRFBs are not the same as bodies which are not RFBs;
rather, they are UK deposit takers within the same group as RFBs.
The FCA did not propose to extend the disclosure regime to all
firms which fall outside the ring-fencing regime. The legislation
required NRFBs to provide information on any actions they undertook
which RFBs are prohibited from undertaking. The FCA proposed that
this information should be high-level and preceded by a
scene-setting narrative on ring-fencing; should be provided online;
and should only be provided to depositors entitled to hold an
account with an NRFB (those with assets of more than
£250,000). Information would be provided to eligible
depositors who currently have an account at a firm that will become
an NRFB before that designation takes effect. Once a bank becomes
an NFRB, the information would need to be provided before a
depositor opens an account. The FCA also proposed that no further
changes were necessary to the FCA Handbook. All of these points
were open to consultation.

Guidance on the FCA's approach to the implementation of
ring-fencing and ring-fencing transfer schemes

The FCA has set out in draft form its guidance regarding its
approach to its duties under ring-fencing transfer schemes (RFTSs).
RTFSs are schemes by which firms may use the legal procedures under
Part VII of FSMA to give effect to any transfers of business needed
to adhere to the new ring-fencing regime. The PRA will lead RTFSs,
but will be required to consult the FCA at certain points in the
process. The FCA set out its criteria for setting out its views on
proposed skilled persons to produce reports on the schemes before
they go to court for approval, its expectations for the content and
form of those reports, its guidance on the notice firms have to
give prior to the scheme being heard in court, and the matters it
will consider when participating in court proceedings.

The implementation of ring-fencing: prudential requirements,
intragroup arrangements and use of financial market
infrastructures

The PRA set out further details of its proposed policies in
relation to ring-fencing. This follows CP19/14, which set out the
PRA's proposals on legal structure, governance and continuity
of services and facilities, and a subsequent policy statement
(PS10/15). The PRA began with proposals to ensure that ring-fenced
bodies (RFBs) have adequate financial resources, by requiring that
RFBs meet specific prudential requirements on a sub-consolidated
basis. The PRA's proposals are intended to ensure that RFBs are
insulated within the sub-group they are part of, and that they
avoid financial contamination by other group members by heavily
restricting the flows of capital in and out of the sub-group.
Further to this, the PRA proposed guidance to ensure that RFBs deal
with members of their group on arm's length terms, as required
by statute, and explained how they would interpret that phrase. The
PRA, also as required by statute, sought to define which
"exceptional circumstances" would allow an RFB to
participate in inter-bank payment systems, and, more generally, the
conditions under which RFBs could participate in central securities
depositories and central counterparties. The PRA also proposed to
ensure RFBs were required to demonstrate their compliance with
every ring-fencing obligation and to review their policy towards
the exceptions permitted by the PRA. Finally, the PRA set out its
preliminary views on additional reporting requirements for RFBs.
The Consultation Paper was accompanied by draft rules, a draft
supervisory statement and proposed consequential changes to
existing PRA publications.

MiFID2

Uncertainty over timing for implementation

There is still uncertainty over whether the implementation of
MiFID2 will, indeed, be delayed (in whole or in part), but some
reports suggest that this is likely.

FCA's first consultation paper in relation to
implementation

The FCA published its first consultation paper (open until 8
March 2016) in relation to the implementation of MiFID2 in December
2015, and has said that it anticipates publishing a second
consultation in the second quarter of 2016 (it also anticipates
that the PRA will consult during 2016). The consultation relates to
the FCA's regulation of the secondary trading of financial
instruments, and considers: (a) trading venues (Regulated Markets,
Multilateral Trading Facilities and Organised Trading Facilities);
(b) Systematic Internalisers; (c) transparency; (d) market data;
(e) algorithmic and high-frequency trading requirements; (f)
passporting and UK branches of non-EEA firms; (g) proposed
extension of the FCA's Principles for Business; and (h)
proposed revisions to the FCA's Perimeter Guidance Manual.

Other developments

Smarter Consumer Communications

With this discussion paper, the FCA intended to start a debate
around how the regulator and the industry could deliver information
to consumers in more effective ways. The FCA commissioned a review
of customer literature in the UK and abroad to identify good
practice. The discussion paper argued that too often, customer
literature is written to conform to regulatory requirements and/or
in anticipation of litigation, and this should change to focus on
customer understanding. The FCA proposed to review its Handbook to
make sure its disclosure requirements assist the customer rather
than merely creating red tape for firms. In particular the FCA
recommended that firms should highlight important terms and
conditions instead of hiding them within large blocks of text, that
firms should be more explicit about fees and charges, that firms
should alert customers to the existence of the FOS, and that firms
should clarify the extent of customers' recourse to the FSCS.
The discussion paper ends by inviting firms to share best practice
and suggestions as to how best to communicate to customers. The
discussion paper is of note because the FCA may decide to amend its
Handbook in order to simplify the disclosure requirements and make
the required disclosures more customer-friendly.

Restrictions on the retail distribution of regulatory capital
instruments – final rules

The FCA published final rules regarding the promotion and sale
to retail clients of contingent convertible instruments (CoCos), or
interests in funds the investment returns of which are "wholly
or predominantly linked to, contingent on, highly sensitive to or
dependent on, the performance of or changes in the value of"
CoCos. The policy statement also includes rules relating to mutual
society shares, which are not discussed here.

The rule changes themselves are made in COBS, predominantly COBS
22.3 and came into force on 1 October 2015, following the
introduction of temporary rules in October 2014. The FCA has stated
that it views CoCos as inappropriate for non-sophisticated retail
customers of ordinary means. Interestingly, the feedback received
to the FCA's consultation indicated that, while industry
respondents were broadly supportive of the FCA's proposals,
investors were not. The majority of the investors who responded
were, it appears, holders of the
CoCos issued by Lloyds Banking Group which were the subject of
the judgment summarised above. In broad terms, the new rules
prevent firms from selling CoCos, or communicating/approving
inducements to invest in CoCos, to retail clients in the EEA. There
are exceptions, including where the client is a sophisticated
investor or certified high net worth investor. In the latter case,
however, and where the client has self-certified as being
sophisticated, the firm must consider the CoCo to be suitable for
the individual (within the meaning of COBS 4.12.5G). The
restrictions on sale do not apply to MiFID business, although the
restrictions on promotion do. The person responsible for compliance
oversight, or someone under his or her supervision, must also
record the sale/promotion, which exemption applied and why, and
such record must be maintained for five years.

The FCA responded to industry concerns by amending the
definition of a CoCo, which is drawn by reference to current
capital requirements, and which firms will wish to consider when
deciding whether the new rules apply. In general, the FCA's
view appears to be that, as capital requirements have changed, so
too the provisions of CoCos have become more complex, risky and
vulnerable to asymmetries of information. This approach is also
interesting in the context of the Court of Appeal's approach to
the position of retail investors in the LBG CoCos discussed above.
More generally, the FCA has indicated that it will keep in mind
criticisms that it is applying its product intervention powers
inconsistently.

Consumer credit − feedback on CP15/6 and final rules and
guidance

In this policy statement, the FCA presented its final rules on
the consumer credit regime, following proposed rules in
consultation paper 15/6, published in February 2015. The FCA
largely decided to retain the proposed rules outlined in CP15/6 in
light of the consultation responses. However, the FCA decided to
amend some proposals and delay others. The FCA amended its draft
provisions on guarantor lending. It limited their scope to
guarantors and borrowers who are "individuals", and
lessened the potential impact of obligations on lenders to explain
the contract to the guarantor, by allowing for such explanation to
be provided as part of independent legal advice received by the
guarantor. It allowed lenders to undertake different
creditworthiness checks on guarantors as compared with borrowers.
The FCA has also weakened lenders' obligations regarding
pre-contract explanations and creditworthiness checks on borrowers
themselves. In relation to financial promotions, the FCA has
clarified that rules relating to APR comparisons in financial
promotions relate to credit, rather than to the goods or services
financed by the credit. The FCA has also delayed a proposal in
PS14/18 to make GABRIEL reporting mandatory. The FCA has also
announced consumer-credit related thematic reviews relating to
staff remuneration and early arrears management in unsecured
lending, and further reviews of the Consumer Credit Act leading up
to 1 April 2019.

Flows of confidential and inside information

The FCA conducted a thematic review of the way in which the debt
capital markets and mergers and acquisitions departments of 16
small to medium-sized investment banks managed confidential and
inside information. The FCA considers, however, that its findings
ought to be considered by all firms.

In general terms, the FCA emphasised the need for firms to
consider circumstances that might pose heightened risk of misuse of
information or conflicts of interest, and manage these accordingly.
The FCA also said that the role of senior management and lines of
reporting were not always sufficiently clear, and that the role of
the compliance function was not always appropriately positioned.
Not all senior managers the FCA spoke to understood the difference
between confidential and inside information, and some seemed to
emphasise the role of compliance at the expense of their own part
in ensuring good practice. In some firms, compliance was physically
distant from the front office, and seen as an administrative
function, whereas in others, the over-strong presence of compliance
meant that the front office relied on it too much. The FCA also
suggested that information was sometimes shared too widely within
firms, for example at team meetings. Finally, the FCA found that
policies and procedures, and surveillance techniques, were not fit
for purpose in all cases. Firms had also not given enough thought
to the physical location of individuals whose roles might create a
conflict of interest.

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On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

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The event will include a number of prominent speakers from Europe and Iran. Four European Ambassadors to Iran have also been confirmed as speakers.

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